Bank of England Likely to Hold Rates Steady Amid Rising Wage Inflation

Highlights:

• Interest Rate Pause Expected: Bank of England unlikely to cut rates this Thursday as wage growth remains high.
• Wage Inflation Accelerates: Regular pay rose 5.2% year-on-year in October, exceeding forecasts.
• Rate Cuts Pushed Back: Analysts predict the first rate cut may come in February 2025, with gradual easing to follow.

The Bank of England (BoE) is widely expected to keep interest rates unchanged at 4.75% this Thursday, as fresh data on wage inflation reduces hopes of near-term cuts. Analysts, including investment bank UBS, suggest the central bank will maintain its cautious approach amid persistent economic uncertainty.

Wage growth figures released by the Office for National Statistics (ONS) showed regular pay, excluding bonuses, rose by 5.2% year-on-year in October. This was an increase from the previous month and above the 5% forecast, indicating inflationary pressures remain entrenched in the labor market.

Interest Rate Outlook: Patience Over Policy Easing

UBS and other analysts anticipate the BoE will delay rate cuts until early 2025. UBS projects a gradual easing of monetary policy, with the first rate cut likely in February 2025. A cumulative reduction of 150 basis points is forecast by the end of next year, which would bring the cash rate down to 3.25%.

The higher-than-expected wage growth adds complexity to the BoE's inflation battle. Despite recent progress in taming consumer price inflation, wage pressures suggest underlying economic resilience that could stoke inflation further.

“The wage moves are inflationary at a time when the battle was close to being won,” commented Richard Hunter of interactive investor. “This release adds further probability that the central bank will leave interest rates at current levels before reviewing the situation in the new year.”

Economic Data Reinforces Caution

October’s inflation figures, which came in slightly higher than expected, have already prompted caution among policymakers. Combined with strong wage inflation, the latest data has reinforced the BoE’s stance to maintain rates until clearer signs of cooling pressures emerge.

This cautious approach reflects the broader uncertainty in the UK economy, where mixed signals—ranging from stagnant GDP growth to resilient wage gains—complicate the outlook. While inflation has fallen significantly from its peaks, the BoE remains wary of premature rate cuts that could reignite price pressures.

Wage Growth vs Inflation Battle

The ONS report underscores the challenge facing policymakers. Wage inflation at 5.2% continues to outpace headline consumer price inflation, which currently stands at 4.6%. Such a dynamic risks embedding inflationary expectations and delaying a full recovery.

Analysts also caution that upcoming labor market data and inflation trends will be pivotal in shaping the BoE’s decisions over the coming months. Should wage growth remain elevated, it may further postpone expectations of monetary easing.

Conclusion: Rate Cuts Delayed Until 2025

The Bank of England appears set to hold interest rates steady this week, as stronger-than-expected wage growth reduces the likelihood of immediate cuts. Analysts predict the BoE will adopt a measured approach to monetary easing, with the first rate reduction likely in February 2025.

While inflation remains on a downward trajectory, persistent wage pressures mean the central bank’s fight against rising prices is far from over. The coming months will be critical in determining the BoE’s policy path as it navigates a delicate balancing act between supporting growth and controlling inflation.